One of my passions is equipping consumers of financial services with the tools that they need to select the right investment service for them. It has become a passion of mine through 12 years of hearing potential clients asking questions that stem from propaganda meted out through mainstream media or large institutions.
Essentially consumers are asking questions that they have sub-consciously been trained to ask versus those that they should be asking when selecting an adviser. One great example is “what is the historic return of your investment service proposal”? This question has no relevance when deciding on an investment service so why is it the first question many people ask?
The media makes us obsessive about league tables, you’ve only got to pick up any financial newspaper to see a league table of the best performing fund over the past 3, 5 or 10 years. The tables are published because they often encourage “movement of money” exiting poor performing funds and moving to funds at the top of the performance table, this can be a good revenue generator for large financial institutions but it has no place in improving client outcomes.
The facts – As at June 30 2011 more than 70% of actively managed general Australian share funds failed to outperform the index (S&P/ASX 200 Accumulation Index)* over a rolling 5 year period. That means you or your adviser has a less than 1 in 3 chance of picking a manager that at least beats the “do nothing” benchmark. If you then try and pick funds that are consistently at the top of the league the odds get very long very quickly. In other words past performance tells us nothing about the investment success or failure you will experience when evaluating a new service.
As Babe Ruth said “yesterday’s home runs don’t win today’s games”
So what are the more appropriate questions consumers should be asking when evaluating an investment service? In my view the questions need to centre on the things that can be controlled because this is where the consumer can get certainty and genuinely measure the relative pros and cons of an investment service. Here are my top ten questions to ask your financial services professional when comparing investment services:
1. What are the fees?
2. Does the investment service suit my personal requirements/objectives? If so why?
3. Is the service optimised for tax purposes?
4. Can I see exactly what investments I own (transparency)
5. Do I have liquidity (can I get my cash if I need it)
6. Does the investment manager communicate regularly to me?
7. Will I have any control over my investments?
8. Does the investment manager have a well-defined investment philosophy?
9. Who will be making investment decisions on your behalf? The Financial Adviser or a professional Investment Manager.
10. How many of your clients are meeting their financial objectives?
* Source: Standard & Poor’s, Morningstar